July 2014

July 30, 2014

According to the National Association of Realtors, the percentage of first-time buyers in the housing market today is 29 percent. For many students, substantial student loan debts prevent them from entering the real estate market to take advantage of the current historically low mortgage rates.

Students’ loan debts play a significant role in the current mortgage market. Specifically, student loans are reported to credit reporting agencies and are a factor in qualifying for a mortgage loan. Students with a large amount of debt will likely not qualify for a mortgage.

According to Bernard Weinstein, Ph.D. and Adjunct Professor of Business Economics at Southern Methodist University, the total balance of outstanding student loans exceeds $1.1 trillion, an amount greater than all existing credit card debt. In addition, according to Dr. Weinstein, the average amount owed at graduation by students with a bachelor’s degree has jumped from $10,000 to $40,000, while the average balance for graduate students has increased from $18,000 to $56,000. Also, delinquency rates on students’ loans have doubled to 12 percent over the past eight years while the rates have fallen on credit cards, mortgages, and auto loans.

According to Bennie Waller, Ph.D. and Professor of Finance and Real Estate at Longwood University, students must realize the financial consequences of debt, which include student loans. All borrowed funds must be repaid. Dr. Waller states that students must recognize that the funds must be repaid when choosing to pursue an advanced degree.

Dr. Weinstein suggests that over the long term, more job creation and higher real incomes for younger workers offer the best hope for securing a mortgage and boosting home purchases.

Be sure to consult experienced legal counsel for questions and concerns.

July 23, 2014

In Clark v. Rameker, the Supreme Court held that IRAs do not qualify for a bankruptcy exemption, meaning IRAs are not protected from creditors in bankruptcy.

The bankruptcy code states that a debtor may exempt amounts that are (1) “retirement funds,” and (2) exempt from income tax under one of several specified internal revenue code provisions.

In Clark, a woman inherited her deceased mother’s IRA as the sole beneficiary. The IRA was worth $450,000, and the woman chose to take monthly distributions from it. The woman, Mrs. Clark, filed a bankruptcy petition under Chapter 7 of the bankruptcy code. Specifically, Mrs. Clark hoped to exempt the inherited IRA.

Creditors, however, objected to the exemption, arguing that the funds held in the inherited IRA were not “retirement funds” within the meaning of the bankruptcy code, and therefore, could not be exempted from the bankruptcy estate. Ultimately, the issue came before the Supreme Court.

The court decided that funds held in inherited IRAs are not “retirement funds.” The court held that “retirement funds” describes money that is set aside for the time that a person is no longer working, and this determination should be based on the legal characteristics of the account holding the funds and whether the account is one that was set aside for when an individual is no longer working.

The court held that there are three legal characteristics of an inherited IRA that made funds in them not for the purpose of retirement:

Inherited IRAs prohibit contributions to the account; An inherited IRA requires that the accounts be depleted over time, which is not a feature of an account set aside for retirement; and

Inherited IRA owners may make penalty-free withdrawals from the account at any time, but traditional or Roth IRA accounts are subject to an early withdrawal penalty.

How might one avoid the result that Mrs. Clark endured? Set up a trust for beneficiaries. The IRA owner could name specific trust beneficiaries. Also, a spousal beneficiary of a decedent’s IRA has the option of treating the IRA as his or her own, rather than being subject to the general rules of “inherited IRAs.” In this arrangement, the surviving beneficiary spouse, as an IRA owner, may defer the start of lifetime IRA distributions to his or her required beginning date.

July 02, 2014

In March of 2014, a 51 year old Kentucky woman, Sheryl Bruner, was found guilty of defrauding the Social Security Administration, bankruptcy fraud, and money laundering. The federal jury found that Bruner fraudulently claimed that she was disabled and had no funds or income. Despite having more than $1 million dollars in assets, Bruner filed for bankruptcy in 2013.

Bruner, already in jail for federal charges of bankruptcy and Social Security fraud, has pleaded guilty to defrauding the Kentucky Medicaid Program. She has agreed to an 18-month prison sentence, to pay $550,000 in restitution and to forfeit $223,028 in cash to the state.

Defrauding the Social Security Administration is costly. Take a lesson from the Sheryl Bruner story: do not file for bankruptcy to hide your assets, and do not claim to have no funds or sources of income if you do have the funds.